1. You have the opportunity to invest in a European Call option with the following attributes. Exercise price =Kshs. 10.00 Term to expiry T= 3 months Current share price= kshs. 10.20 Volatility (Standard deviation)=0.24 Continuously compounded risk free rate = 9 % per year The underlying share relates to a company in Kenya which does not pay dividends. Required: Use the Black-Scholes Model to value the option

2. As a real estate analyst, a prospective developer approached you to value a building along that occupies a site measuring 60x20m2 . The planning for area allows a plot coverage of 75% and a plot ratio of 7.0. The parking is to be done in the basement. Modern offices in the area let for shs 200 per m2 per month with a service charge of 10%. The car spaces rent for shs 500 per month, the provision being one car space for every 20 m2 of office floor space. Current construction costs average shs 4,800 per m2 and the construction period would be 36 months. The prospective developer expects to receive his future income for the next 50 years. The following is added information:

i. Cost of capital (@20% for 12 months

ii. Professional fees @ 15 %

iii. Disposal costs (legal fees, commissions, etc) @10% of developed value iv. Developer's profit at risk@15%

Required: Advice a prospective developer how much he should pay for the site if he expects a return of 18%.

3. You are considering investing in one or both of the two financial securities i and j that have the following distribution of possible one-year returns. As a financial analyst, you have estimated four possible states of nature with equal probability, the returns and probability for the two securities are as follows:

Probability (Pij) Possible rate of return (Ri) Possible rate of return (Rj)

0.2 5.00% 10.00%

0.3 12.00% 15.00%

0.2 25.00% 10.00%

0.3 20.00% 9.00%

Required: i. Calculate the covariance and correlation of two securities. (14 Marks) ii. If the financial manager consider a portfolio of the two securities i and j, where the weight of i is set at 55%, , expected return of the portfolio, variance and standard deviation of the portfolio